The new income tax law Direct Tax Code is likely to target exemptions. The process of removing exemptions, which has been set in motion in the Budget, will be taken forward by the government during formulation of the new law.

The new law gives another opportunity to build political consensus at the national level on tax exemptions, a senior revenue department official said adding that it would be an occasion to look at exemptions afresh.

He said the main objective behind the overhaul of the existing law is to simplify it. But, since the law is being reworked after more than four decades, it gives an occasion to clean up. More so, since it would be debated and discussed in the Parliament.

The Standing Committee on Finance, which comprises members of other parties as well had favoured removal of exemptions. Removal of exemptions can lead to lowering of statutory tax rates besides bringing equity in tax rates. At present, the effective tax rates for some of the big corporates is as low as 19.2% but for others it is much closer to the statutory rate of 33.66%.

The total revenue foregone for 2006-07 on corporate tax and personal income tax is estimated at Rs 65,587 crore. The total revenue foregone including excise and customs stood at Rs.2,35,191 crore. If these exemptions are removed, the government would find flexibility for lowering tax rates.

In the 07-08 Budget, the government has withdrawn the tax exemption available for airline companies on rentals paid for leasing aircraft. The break available to construction companies building small houses has also been discontinued. Both exemptions were expiring on March 31 and have not been extended. The government has also brought in software technology park and export oriented units under minimum alternate tax.